Creditors sue to get money back from Tribune Co. executives, managers

About 200 lawsuits have been filed separately against former, current employees

December 11, 2010|By Ameet Sachdev, Tribune reporter

Owen Youngman worked for the Chicago Tribune for 37 years. When the newspaper's parent, Tribune Co., went private in December 2007, he received a check for $328,049 that paid him for stock-based compensation he had accumulated during his management career.

Now, three years later, Youngman, who no longer works for the company, is being sued to return the money.

He is one of about 200 current and former Tribune Co. employees who find themselves playing an unanticipated role in the company's drawn-out bankruptcy case: individual targets of legal action in a Delaware bankruptcy courtroom related to the company's disastrous leveraged buyout.

Some of the 200 are former senior executives, like Dennis FitzSimons, who left the company as chairman and chief executive with tens of millions of dollars and who, as an architect of the deal, might have expected to become the focus of litigation.

But many others, such as Youngman, are or were managers in Tribune Co. units like the Chicago Tribune and had nothing to do with the leveraged buyout. Yet they also find themselves in the cross hairs, some being targeted for $300,000 or $400,000, others for as little as $10,000, in an effort by creditors to recover as much money as possible from the bankrupt estate.

It's another strange twist in the saga of Tribune Co.'s Chapter 11 case, which passed the two-year mark last week. Creditors are engaged in a high-stakes battle with the Chicago-based media company to win control of the reorganization process, and the Official Committee of Unsecured Creditors wants to claw back about $180 million in compensation.

Youngman, once the Chicago Tribune's business editor and now a professor, said he wasn't surprised to be targeted by the creditor action. But others were caught off guard by the suits, which were filed between Dec. 3 and 7. And now they are trying to figure out how great a risk they face of being asked to return money that may have been spent long ago.

"I was vaguely aware of what was going on," said Tim Franklin, the former editor of the Baltimore Sun, a Tribune Co. newspaper, who received $236,253 for stock-based compensation. "But I was not aware that I might be a part of it." He declined to comment further.

It's routine for creditors to try to recover payments made to company insiders and suppliers before a business goes into Chapter 11. But what makes the legal claims filed in the Tribune Co. bankruptcy unusual is not just the number of targets — separate lawsuits against each of the approximately 200 current and former employees — but the amount of money at stake.

Nine executives received more than $5 million, and 12 got more than $1 million that the creditors want back, according to a review of the complaints. FitzSimons is the biggest target; the creditors committee wants to take back $28.7 million. Through his attorney, he declined to comment.

The payments were all triggered by one event: Tribune Co.'s $8.2 billion deal to become a private company owned by an employee stock ownership plan and controlled by Chicago real estate tycoon Sam Zell, who also faces litigation over the buyout. The transaction was heavily financed with debt.

Thousands of restricted stock units — compensation measured in company stock — that the company previously had granted to executives were converted into cash when the transaction closed Dec. 20, 2007. The company also had to pay out compensation that some managers had deferred for tax-planning reasons.

Some executives received "success" bonuses for their significant involvement in the transaction, while a handful, such as FitzSimons, received so-called phantom equity that provided incentives to stay with the company through a transition period. FitzSimons and other top managers also left the company with "golden parachute" severance benefits.

Most of the money was paid out seven days after the deal closed. Less than a year later, Tribune Co. declared bankruptcy.

The timing is key.

The breathtaking speed of the buyout's failure left all the insider compensation tied to the deal open to being clawed back by creditors under the peculiarities of the U.S. bankruptcy code. Bankruptcy law does not make a distinction between the architects of the disastrous leveraged buyout and those who were just performing their day-to-day duties, like Youngman.

But it does give creditors permission to demand back insider payments made in the year before a Chapter 11 filing; the Tribune Co. deal closed just within that time frame, in late December 2007. The Chapter 11 filing came in early December 2008.

The creditors' claims have become a distraction for the company because about 90 current employees are defendants.